GDP gaining steam

The U.S. economy looks set to weather the headwinds from Hurricane Sandy and the budget battles in Washington after picking up speed in the third quarter.

Gross domestic product probably increased at about a 2.9 percent annual rate in July-September, according to economists from Goldman Sachs Group Inc. and Barclays Plc. That would be the fastest quarterly growth this year, beating the Commerce Department’s initial estimate of 2 percent.

“The economy’s momentum has picked up a bit” as the fundamentals of the private sector “are improving,” said Jan Hatzius, chief economist at Goldman Sachs in New York. He projects third-quarter expansion will be revised up to 2.8 percent, and the fourth quarter may come in at 1.7 percent.

Help is coming from a housing recovery, strengthening job market and healthier household finances that are driving gains in consumer confidence and spending. While the damage from Sandy and an anticipated tightening of fiscal policy mean growth will decelerate this quarter and next, the world’s largest economy may emerge on stronger footing in the second half of 2013.

The Bloomberg Economic Surprise Index, which compares 38 U.S. indicators with analysts’ forecasts, exceeded zero in mid-October for the first time since May and was 0.04 on Nov. 16, up from this year’s low of minus 0.4 on July 30. The projected upward revision to third-quarter GDP, due from the Commerce Department Nov. 29, will come largely from a narrower trade deficit and a bigger jump in stockpiles than initially estimated, economists said.

While the inventory-accumulation data “don’t have much carry-forward signal in them,” consumer spending in the last few months has been “heartening,” Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, told reporters Nov. 15 in Charleston, W.V. “That is a positive for growth.”

One immediate restraint is the fallout from the largest Atlantic storm ever to hit the U.S. Retail sales fell in October for the first time in four months as the hurricane hurt receipts at some stores. The 0.3 percent drop followed a 1.3 percent gain in September that was larger than previously reported.

Sandy may trim as much as 0.5 percentage point from fourth- quarter GDP, according to Hatzius, while Dean Maki, chief U.S. economist for Barclays in New York, projects a “downside risk” of as much as 0.3 point.

A bigger concern is more than $600 billion of tax increases and government spending cuts slated for the start of 2013 unless Congress acts. Maki projects about $200 billion of fiscal tightening; under these circumstances, “solid momentum” entering the final quarter of the year would give the U.S. enough of a cushion to sustain growth.

“It doesn’t make us invulnerable,” Mr. Maki said. “But it’s better than if the economy had already been slowing sharply and then we were hit with these types of events.” His growth forecasts include 2.9 percent for the third quarter and 2.5 percent for the fourth, followed by 1.5 percent in the first three months of 2013 and a pickup to 2 percent for April-June.

Concern over the budget showdown between President Barack Obama and the Republican-controlled House of Representatives has helped push the Standard & Poor’s 500 Index down 4.8 percent since Obama’s Nov. 6 re-election.

Better times may be ahead for the stock market as the economy is showing “a pickup, a broadening out, a firing on more cylinders,” said James Paulsen, chief investment strategist in Minneapolis for Wells Capital Management, which oversees about $325 billion. Shares of American manufacturers and basic-materials producers are most likely to benefit as growth strengthens, he said.